He's called the Oracle of Omaha for good reason. Warren Buffett -- all-around investing genius and founder of Berkshire Hathaway (BRK.A 0.07%) (BRK.B 0.10%) as we know it -- has the stock-picking track record to support that unofficial title. While his conglomerate may have gotten off to a slow start coming out of 2020's pandemic-induced market plunge, its share price is up nearly 24% year to date, while the S&P 500 (^GSPC -0.12%) has risen by just under 21%. That's a big difference when you're comparing a buy-and-hold portfolio to an index-based benchmark. Plenty of investors would be thrilled with that sort of edge. Beating the market is tough to do!
And yet, it's not crazy to believe you can not only beat the market, but perhaps even beat Buffett at his own game. The trick lies in successfully doing what Berkshire Hathaway is mostly unable to do, and doing what Buffett doesn't particularly like to do. Here's a look at the three biggest things you can do differently than Buffett in your investing strategy.
1. Invest in the types of growth stocks he typically doesn't consider
Berkshire Hathaway's portfolio has certainly evolved from its early, value-oriented days. For instance, its biggest single stock holding right now is Apple (AAPL -0.34%) -- a company that Buffett might not have even dreamed of investing in a couple of decades ago (though Buffett may not have made the Apple buy call on his own). Software company Snowflake (SNOW -2.79%) is another relatively curious addition to Berkshire's collection of stocks, in that it's quite unprofitable and will remain so for a while.
Nevertheless, most of Berkshire's positions are in established value companies like Bank of America (BAC -1.29%), Verizon (VZ -0.39%), and Coca-Cola (KO 0.88%). Buffett likes them because, first, he understands their business models, and second, they pay reliable dividends. It also doesn't hurt that steady-performing value stocks have historically managed to catch up with and even surpass the hot-and-cold track records of gains that growth stocks tend to dish out.
It's just possible, however, the market has outgrown its resilient-but-lukewarm love for value stocks. Since the mid-1990s, growth stocks have rather reliably outperformed value names despite their higher volatility. Overall, as a group, they've gained nearly three times as much as value stocks have over that timeframe.
That's not to suggest there's anything inherently wrong with investing in value stocks. But refusing to be at least a bit speculative leaves the sort of gains that have been dished out by growth companies like Facebook and Nvidia on the table.
2. Step into an entire position on a dip
As a small retail investor, you enjoy one advantage that giant players like Berkshire Hathaway don't have: When you put a few thousand bucks into a trade, the market doesn't even notice. Relative to your needs, there will almost always be plenty of any particular stock available to buy or sell at the current market price at any given time.
When you're trying to put a few hundred million or even a couple billion dollars into a particular equity though -- as Buffett typically is -- it catches people's attention. In some cases, it can even meaningfully move a stock's price, perhaps unwinding the pullback that made the stock so attractive in the first place.
Don't misunderstand. The prospect of moving the market doesn't prevent the Oracle of Omaha from steering Berkshire into or out of trades. But the conglomerate has to be smart and patient in how it moves. You don't, so you can buy all the shares you want to (finances permitting), whenever you want to, on most pullbacks.
Of course, this assumes you're actually willing to step into new positions on their way down rather than waiting until they're on their way back up... which you should be. The key is pre-picking your preferred price point and sticking to it. As Buffett himself has even said, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price" -- even though he often has to fight for that fair price. Precision-timing the entry misses the point.
3. Learn about different industries and diversify your holdings
Finally, perhaps the most overlooked liability of the Berkshire stock portfolio is that, at any given time, it's not particularly well diversified.
Of the $323 billion worth of equities currently owned by Berkshire Hathaway, Apple accounts for 40% of the collective value. Financial stocks like Bank of America, American Express (AXP -0.48%), and U.S. Bank (USB 0.64%) make up another quarter of the portfolio -- and that doesn't count the financial services firms among the conglomerate's wholly owned subsidiaries, such as Geico Insurance or Berkshire Hathaway Reinsurance. Buffett is also heavily exposed to industrial names, both publicly traded players and Berkshire-owned companies like Lubrizol and several railroad-related businesses.
Conversely, he's arguably underexposed to technology stocks, materials, healthcare, and consumer-facing companies.
That's not a fatal flaw. Buffett has often touted the investing philosophy of "buy what you know," which is wise. His acolytes aren't straying too far from that advice, though they may know more about certain businesses than Buffett does.
But it's not as if this willingness to concentrate his portfolio too much in familiar industries hasn't occasionally come back to haunt him. Berkshire took a bath on its investments in Delta Air Lines (DAL 0.93%), Southwest Airlines (LUV -0.82%), American Airlines (AAL -0.07%), and United Airlines (UAL), which it sold early last year when the pandemic first rattled markets. Less exposure to the air travel industry would have reduced the pain the portfolio suffered in the first half of 2020, and perhaps prevented Berkshire Hathaway from underperforming the S&P 500 last year.
You should still understand the business model of any company you buy. But, rather than eschewing unfamiliar businesses, it might be smart to learn about some new ones so you can spread your risk out across more sectors.